Understanding the Cryptocurrency Market in India: Challenges and the Way Forward

Cryptocurrency has emerged as a popular medium of exchange and investment in India and around the world. However, the lack of a regulatory framework for crypto assets in India poses significant challenges for businesses and investors. In this blog, we explore the current status of the cryptocurrency market in India, the grey areas surrounding it, and the way forward.

What is Cryptocurrency?

Cryptocurrency is a digital medium of exchange that uses encryption techniques to control the creation of monetary units and verify transactions. While most cryptocurrencies are not regulated by national governments, they are becoming increasingly popular as an alternative means of financial exchange.

India's Regulatory Framework for Cryptocurrency

In 2017, the Reserve Bank of India (RBI) issued a warning that virtual currencies/cryptocurrencies are not a legal tender in India. However, no ban on virtual currencies took place. In 2019, RBI issued that trading, mining, holding or transferring/use of cryptocurrencies is subject to punishment in India with a financial penalty or/and imprisonment up to 10 years. RBI also declared that it may launch digital rupee as a legal tender in India in the future. In 2020, the Supreme Court of India removed the ban on cryptocurrencies imposed by RBI. In 2022, the Government of India clearly mentioned in the Union budget 2022-23 that the transfer of any virtual currency/cryptocurrency asset will be subject to 30% tax deduction. Gifts in the form of virtual assets/cryptocurrencies will be taxed in the hands of the receiver. In July 2022, The Reserve Bank of India (RBI) recommended a ban on cryptocurrencies citing ‘destabilising effects’ for the country’s monetary and fiscal health.

Understanding the Legal Ambiguity of Cryptocurrency in India

The absence of a regulatory framework for cryptocurrency in India poses several challenges. The volatile nature of cryptocurrency can lead to significant losses for investors. Additionally, the lack of reliability and security associated with digital transactions exposes investors to fraud and hacking. Furthermore, the flooding of advertisements in the crypto market to lure people into speculating creates concerns of overpromising and non-transparent advertising. There are also concerns regarding scalability, money laundering, and the possibility of economic disbalance.

Steps for Moving Forward

To address these challenges, there needs to be a regulatory framework for cryptocurrency in India. Cryptocurrencies should be explicitly defined as securities or other financial instruments under the relevant national laws. Additionally, linking India's startup ecosystem with blockchain technology can create job opportunities and revitalize the startup ecosystem. There should be a risk-based and context-specific international cooperation to regulate cryptocurrency flow. Finally, the introduction of a Central Bank Digital Currency (CBDC) in India can help regulate the cryptocurrency market and provide a secure and reliable alternative for digital transactions.

Conclusion

Cryptocurrency has emerged as a popular means of financial exchange and investment in India and around the world. However, the lack of a regulatory framework for cryptocurrency in India poses significant challenges. The grey areas surrounding cryptocurrency in India, such as volatility, reliability and security, lack of regulatory framework, flooding advertisement, stock-market issues, scalability concern, money laundering, possibility of economic disbalance, and absence of an ombudsman for grievance redressal mechanism, need to be addressed. To move forward, there needs to be a regulatory framework for cryptocurrency in India, linking India's startup ecosystem with blockchain technology, and the introduction of a Central Bank Digital Currency (CBDC) in India.